Claims management companies (CMCs) could be forced to pay back millions to consumers under new plans announced yesterday by the Ministry of Justice.
The MoJ has handed over responsibility for dealing with complaints about the firms, which handle compensation claims in areas such as payment protection insurance mis-selling and personal injury, on to the Legal Ombudsman. The change will mean CMCs could be forced to pay up to £30,000 in compensation to disadvantaged consumers, and it is believed the limit could be increased to £50,000.
At present CMC customers must lodge complaints with the Ministry of Justice, which regulates the industry but does not have the power to arrange compensation. The new rules – to be enforced from 2013 – will give consumers the chance to claim redress against rogue CMC firms for the first time.
However, the MoJ will continue to regulate the industry through its Claims Management Regulations Unit. Kevin Rousell, the head of the unit, said: "We will continue to target those CMCs who do not comply and we will work in partnership with the Legal Ombudsman to root out those CMCs that take advantage of consumers."
The MoJ has been cracking down on CMCs following public anger over a rising tide of unwanted texts and cold-calling from unscrupulous firms aiming to profit from the £10bn bank mis-selling scandal relating to payment protection insurance (PPI).
Rogue firms make promises of payouts for consumers, even though many are not even eligible for compensation. The Financial Ombudsman warned this year that people in line for compensation had no need to use CMCs as they could make claims themselves without going through a third party.
It forecast about £50m of PPI compensation it will award this year will needlessly go to claims management companies. CMCs charge about 25 per cent of the compensation payout.
Many CMCs also encourage people – through adverts on TV, newspapers and the internet – to sue for personal injury compensation, and for other losses, even though they may have not been involved in an accident.
The MoJ has banned or shut down more than 700 rogue CMCs but there are still around 3,000 in existence in England and Wales. Mr Rousell said the MoJ would now focus on improving standards and taking wider action on rule-breaking CMCs.
Last week it published proposals to ban CMCs from taking fees from customers without a written contract. It also wants to force firms to state that they are regulated by the claims management regulator rather than by the MoJ, to avoid giving the impression that they are endorsed by the government.
Chris Lawrenson, the head of legal services at the Building Societies Association, said urgent action was needed to crack down on rogue firms. "The CMCs operating in the PPI sector are generating by far the most consumer complaints, 74 per cent according the Ministry of Justice," he said. "Worse still, the vast majority of these complaints are made against just 15-20 firms out of the 1,000-plus authorised."
Richard Lloyd at Which? said: "We want to see the Government do more to clean up the CMC industry. We want a ban on upfront fees and cold-calling, and for CMCs to be required to publish online all of their terms and conditions, fees and charges."
Ian Barlow, a director of CMC firm Money Boomerang, hit back at the criticisms. "For thousands of customers, the claims management industry provides a valuable service by simplifying what can be a difficult process," he said.
He admitted that rogue firms had given the sector a bad name. "The CMC industry, particularly in the PPI sector, has occasionally shot itself in the foot."